Over two million more people are likely to be higher-rate taxpayers by 2028 – thanks to the freezing of the higher rate tax threshold.
If you cross the threshold of £100,000, you’ll be hit even harder with an effective tax rate of 60% – and that particular threshold has been frozen for well over a decade.
To make sure you’re not leaving any tax-efficient stone unturned, here are our top ‘tips’ to help you keep more of your money.
1) Use your annual ISA allowance
Every adult has a £20,000 ISA allowance each tax year, offering a valuable way to protect your savings and investments from capital gains, dividend, and income taxes. For married couples and civil partners, the ISA allowance effectively doubles to £40,000.
There is also a tactic called ‘Bed and ISA’, which involves selling investments to realise a capital gain and then immediately buying back the same investments inside an ISA. This enables all future gains on the investment to be exempt of Capital Gain Tax (CGT).
2) Contribute to a pension
Higher-rate taxpayers benefit from tax relief at their highest marginal rate, so you stand to get a 40% boost on your contributions.
You can contribute up to 100% of your earning, provided your total contributions from all sources (including those made by your employer) do not exceed £60,000, you will receive income tax relief on your personal contributions.
It’s worth noting that money in a pension can’t normally be accessed until 55 (57 from 2028).
3) Use your pension to deal with the £100,000 threshold
The tax-free personal allowance reduces by £1 for every £2 your adjusted net income exceeds £100,000.
Although income that falls within the higher-rate band is taxed at 40%, the personal allowance taper means some of your income could effectively be taxed at a staggering 60% – the so-called ’60% tax trap’.
One way to bring your taxable income below the threshold is to save into a pension, so your adjusted net income falls to under £100,000. For parents, this has the added bonus of retaining their eligibility for tax-free childcare.
If your total income from all sources is over £260,000, you’ll need specialist advice to deal with the tapering of the annual allowance.
4) Check if you can use salary sacrifice
Salary sacrifice, sometimes called salary exchange, is a tax-efficient way for you to make contributions to your workplace pension.
By participating in a salary sacrifice scheme, you can enjoy tax and National Insurance savings on the amount of money you contribute towards the scheme, which can result in significant savings over time.
5) Carry forward unused allowance
The ‘carry forward’ rule allows you to use unused pension annual allowances from the previous three tax years to potentially increase your contributions in the current year.
There is one caveat. You only accrue an allowance by holding a pension. You can’t open a pension today and claim tax relief for the last three years.
The amount you can carry forward depends on how much you’ve paid in and how much you earn. You can only contribute up to the equivalent of 100% of your earnings in a tax year.
6) Use your capital gains tax allowance
Everyone has an annual CGT exemption, which enables you to make tax-free gains of up to £3,000 in the 2024/25 tax year. This can’t be carried forward into the next tax year.
So even though the allowance is less generous than in the past, making full use of it each year could reduce the risk of incurring a significant CGT liability in the future.
7) Offset any loses
You might be able to minimise your CGT liability by using losses to reduce your gain. Gains and losses realised in the same tax year must be offset against each other, which can reduce the amount of gain that is subject to tax.
If some of your losses reduce your gain to below the tax-free allowance, you can carry forward the remaining losses to a future tax year.
8) Flex your income
If you’re a business owner, strategically paying yourself involves balancing your personal needs with business requirements.
You can use a combination of salary, dividends and employer pension contributions to draw funds tax efficiently from your business.
9) Make a charitable donation
Donating to your favourite charities can have a feel-good effect but did you know that your generosity could also potentially reduce your tax bill.
For example, if you’re a higher rate taxpayer (40%) and you donate £100 to charity, your basic rate band is extended by £125. The charity claims the 20% tax from HMRC as usual; however, you also benefit from the donation due to the fact that £125 of income that would have been taxed at 40% is now taxable at 20%.
10) Seek professional advice
An EQ financial planner will help you understand the available tax reliefs, allowances and exemptions, and explain the range of options available to you based on your individual circumstances.
Please get in touch to book a free initial discussion with a qualified financial planner.
Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, to determine the risks associated with the investment and its suitability.
